Posted on 24 Dec, 2015 by John Mayes
The roles of original equipment manufacturers (OEMs), electronics manufacturing service (EMS) providers, contract electronics manufacturers (CEMs) and original design manufacturers (ODMs) are often confused.
This situation is, in part, due to a significant amount of overlap of activities and, as a result, there is frequent misuse of the terms. In an attempt to provide some clarity, this blog provides the generally accepted definitions for each term.
In addition, the post looks at some of the more practical differences between original equipment manufacturers and the electronics manufacturing service providers they may choose to outsource the assembly to.
What is an OEM?
OEM is a term used rather confusingly in several different ways. They may either market complete "‘turnkey" products or just certain sub-systems or components. In the latter example, an OEM offers components or sub-systems that are re-sold by another company as part of their end product.
OEM company business models typically focus on product innovation and development. They design most of the products themselves and own the "rights" to them - i.e. the intellectual property (IP). Increasingly, OEMs outsource all or part of their manufacturing so it could be argued that the "M" in "OEM" is now somewhat outmoded.
What is an EMS provider?
An EMS provider is now the generally accepted term for a contract manufacturer in the electronics field that not only makes products for OEMs but also offers assistance with a wide array of value-added services, including: support with design, design for manufacture, supply chain management, configure-to-order, outbound logistics and repair elements.
EMS companies can be huge - in fact, in the so-called "Tier 1" environment they are multi-billion dollar businesses in their own right. So it’s not a surprise that they manufacture some of the world’s best-known products. For example, Microsoft's Xbox, Apple’s iPhone, HP printers, Cisco routers and a variety of products from companies like Sony and Nintendo are all believed to be built by Tier 1 EMS companies.
While these suppliers will often make "Top 10" lists, they specialise in manufacturing high volume, low complexity products and, as a result, demand multimillion-pound spend levels - which is why much of the world's consumer electronics end up shipping from their factories.
However, for OEMs that design and sell low to medium volume, often complex products, in sectors away from consumer electronics, Tier 1 suppliers may not be the most appropriate fit. Instead, OEMs are encouraged to take an alternative view of the EMS horizon, to find the most appropriate supplier for their business model and product range.
What is a CEM?
CEMs are companies that make products under contract for other companies. They typically take on, wholly or partially, the manufacturing responsibility for OEMs in sectors like industrial, defence, oil and gas, test and measurement, computing, instrumentation, communications and transportation.
Thousands of different products are manufactured each week by contract manufacturers, which are then usually branded with the OEM's name and then sold out by the OEM to its customer base.
What is an ODM?
For completeness, but possibly confusing things further, the term ODM also exists. An ODM is similar to a contract electronics manufacturer, but they typically own IP for the product itself, while regular contract electronics manufacturers use their customers' designs and IP. In addition, CEMs often produce a vast array of different products, across multiple markets, whereas ODMs typically specialise in a small number of specific product types.
Comparing an OEM to an EMS provider
So why do some of the world’s most successful companies choose to outsource their manufacturing? It’s obviously not because they don’t have the skill sets in place or finances available. It’s not uncommon for companies with vast engineering and technical resources to outsource the manufacturing of their products.
Take Apple, for example. Reported at the end of April 2015 as the world’s most valuable company, their product design capabilities are about as good as they get. Yet they still choose to outsource their manufacturing.
If we take a long look at their latest iPhone and think about their A9 system-on-a-chip (SoC), designed to work optimally with iOS - and, similarly, their image signal processors (ISP) that work with the iSight camera (the latter somehow being shrunk down to fit into the incredibly thin aluminium unibody chassis) - it’s clear that Apple remains a design-led business.
So why don’t they build their own products? It’s because they recognised early on that the manufacturing process is not what they are best at doing; and others around them are geared up to do it better and more cost-effectively.
While this is a classic "high profile, high volume" example, in the very different low-medium volume, medium-high complexity sector the same principle applies - it’s all about core focus.
This difference in core focus leads to a number of key differences between OEMs and EMS providers, which can include:
- Choice of assembly equipment - OEMs often have surface mount equipment that takes longer to set up but is faster to run. They may also have dedicated build cells and production lines for each product in their range. EMS companies, on the other hand, must offer more agility. They will choose to invest in equipment that supports much faster changeovers and programming that gives them added flexibility but may run at reduced rates.
- The New Product Introduction (NPI) process - An OEM will design their own products and, therefore, have an established portfolio of products to sell. As a result, the frequency of new products entering the marketplace from them is typically low. If they are currently building the products in-house then there is no real need to share build documentation with a third party supplier. Compare this with a CEM that is working with a wide range of OEMs across multiple markets. They will frequently be asked to deliver "new" products to their customers. As a result, the NPI process for CEMs has to be much more refined and robust as the volume of data they manage, and completeness of this will vary greatly between each different customer and product they manufacture.
- Supply chain expertise - EMS companies typically manufacture for multiple customers producing multiple products, with the resulting need for a much broader and more global supply chain.
- Test design expertise - Similarly, the variety of PCB assemblies and "box build" products for which EMS companies have to design test solutions means that they often have a far greater breadth of experience than OEMs' engineers.
OEMs and EMS companies, therefore, have differences in their priorities, core skills and the levels of utilisation of their manufacturing resources. The length of time required for an OEM to recoup these investments is, therefore, usually much longer.
OEMs considering outsourcing their manufacturing should take reassurance from the fact that there are EMS companies that can do everything the OEM can do but can often do it better, more consistently and more efficiently because of the extended range of products and markets they have to service and the expertise and experience that this creates. This breadth of experience can add value right across the OEM’s business, which can be of great benefit to them.
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